The Farm CPA

Paul is now part of the fourth generation in America that is involved in farming and hopes the next generation will be involved also. Through his blog he provides analysis and insight to farmer tax questions.

Betterment - Why Does That Cost Me Money?

Nov 18, 2010

We had a reader ask the following questions:

"We had a combine fire this fall, and my question is concerning "betterment" deducted from the claim. The combine was a 2010 model, with only 400 hours on it. The damage exceeded $41,000, and the insurance company deducted $4,100 (10%) for "betterment". I assume that I can deduct the amount I paid over and above the insurance payment. Is this deduction common. Maybe it's more of a legal question. Any help is appreciated."

Even though I am not an attorney, I will give my answer on this from my research. Betterment refers to the insurance company replacing parts on equipment with newer parts than was in the equipment originally. For example, you may have a combine that is 10 years old that has a fire and when the insurance company replaces the parts on the combine it purchases brand new parts that have a much greater value than the 10 year old parts on the combine. This is called betterment and the insurance company will adjust the payout to reflect the extra cost or value of the new parts versus the old parts destroyed.

In this case with a 2010 model with only 400 hours, the insurance company may have stretched the definition here, but like driving a car off the lot that loses some value once the odometer no longer reads "new", I suppose there could be some betterment to be charged.

With regards to the extra paid to get the combine back in working condition, that is normally considered a repair expense and 100% deductible. Also, with Section 179 being $500,000 for 2010, even if you "added" something new to the combine as part of the repair process (for example, you may have added a precision ag monitor that was not there before, this would not be a repair but an addition), you should be able to deduct this as part of your Section 179 deduction. But if you are only getting the combine back to what it was before the fire, that will 100% deductible as a repair expense.